As Trade Volumes Soar, Exchanges Cash In

Friday

The latest trading rush is enhancing exchanges’ bottom line, but some analysts worry that the volatility and downbeat economic news may frighten away investors in the long term.

The latest financial market convulsions have been tough for almost everyone, including traders caught on the wrong side of another big swing and pained everyday investors watching their dwindling holdings go down and up — and down again.

But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.

Businesses like the New York Stock Exchange and the Chicago Mercantile Exchange skim cents off each stock or contract bought or sold over their trading floors or computers. With the daily volumes of financial market contracts sent surging through their systems by nervous traders and investors up by billions, the latest trading rush is directly polishing their bottom line.

The effect, however, may be fleeting. The rising volumes have generally not translated into higher stock prices for the exchanges, and they and some analysts are worried that the volatility and downbeat economic news may frighten away investors in the long term.

“Volume is positive on a short-term basis but because it is based on negative macroeconomic factors, these volumes are not necessarily sustainable,” said Joseph M. Mecane, executive vice president for cash trading at NYSE Euronext, which operates the New York Stock Exchange.

The latest swings came Friday when the Standard & Poor’s 500-stock index fell 2 percent in the morning, but climbed back up in the afternoon to finish 1.5 percent higher, as investors digested remarks by Ben S. Bernanke, the Federal Reserve chairman, that left the door open to further support for the economy. The Dow Jones industrial average swung about 363 points during the day, closing up 1.2 percent, to 11,284.54.

Across United States stock markets — including the big electronic exchanges like Nasdaq, BATS and Direct Edge — trading volumes so far in the latest quarter are 17 percent ahead of the same period last year, according to figures from Credit Suisse. Volumes have been hitting levels almost double what they normally are at this usually quiet time of year, Mr. Mecane said.

Markets have been sent wild this summer amid a number of exceptional events, like the showdown over the debt ceiling in Washington, the downgrade by the credit rating agency Standard & Poor’s of the United States’ long-term debt on Aug. 5, the global fallout from Europe’s debt crisis and a raft of data pointing to a stalling United States economy.

On a couple of days earlier in August, stock market volumes touched about 15 billion daily trades, although volumes are now back to about eight billion or nine billion daily.

The stock exchanges on average charge 3.5 cents for every 100 shares traded, according to Credit Suisse. That has declined in recent years with greater competition between the exchanges, so the pop in volumes is not delivering as much to them in increased profits as it would have just a few years ago. The exchanges have also diversified into other business like providing trading technology to banks. That means revenue from stock and derivatives trading accounts for a smaller proportion of overall income. In the case of Nasdaq, for example, it makes up a third of overall sales.

The exchanges, most of which are public companies, generally will not comment on the effect these increased volumes will have on profits.

But analysts like Howard Chen, a financial analyst at Credit Suisse who watches the exchanges, said that because volumes were already tracking 15 to 20 percent above what he had been expecting, earnings should be up a similar amount.

It’s not just the stock market that is experiencing a lift.

Traders have been busily betting on interest rates, commodities, currencies and even volatility itself.

The Chicago Mercantile Exchange where these and other products like United States Treasury futures are in large part traded has recorded a big pick-up in trading volumes recently.

Aug. 9, for example, was a record day for the Chicago exchange, when nearly 25.7 million contracts were traded, beating the last record, which was during the so-called flash crash on May 6 last year, when 25.3 million contracts were traded, the exchange said.

So far during the third quarter, volumes on the Chicago exchange are up 39 percent compared with the same period a year ago, Credit Suisse said.

Futures in gold, oil and the broad stock market index, the S.& P. E-Mini, are all up.

In an era when volatility has become the new norm, another instrument that has had a surge in volumes is the Chicago Board Options Exchange Volatility Index. The VIX, as it is known, measures the short-term implied volatility of options on the S.& P. 500. Financial instruments based on the VIX are traded both electronically and in the exchange’s trading pits in Chicago — where there is a special VIX pit, and 60 dedicated VIX traders.

It is also called the fear index, and as the S.& P. 500 has spiraled down and up, VIX futures and options have become a popular tool for all sorts of fearful investors to protect themselves against the swings — and maybe even make a little money.

“Volatility in itself is becoming a more popular and investable asset class for institutions and also for retail investors,” Mr. Chen said.

Volume in VIX options is up 79 percent and trading in futures on the index soared 290 percent through Aug. 19.

Futures trading this month is already a record, surpassing July, which was the next highest. The single busiest day on record was Friday, Aug. 5, when 1,194,468 options contracts were traded.

“When volumes are up we do well,” said William J. Brodsky, chairman and chief executive of CBOE Holdings.

Mr. Brodsky said the VIX was created with professional investors in mind but is increasingly being embraced by retail investors to protect against volatility.

The VIX generally moves in a range of 15 to 50, although it reached 80 during the financial crisis in 2008. Investors worried that their stock holdings were vulnerable to a sell-off in the market, for example, might buy the VIX as protection because the VIX would most likely rise.

Mr. Brodsky said a couple of dozen VIX exchange-traded notes are now offered by banks like Barclays. They were linked to the VIX and aimed at providing easier access for ordinary investors.

The strange thing is the heightened market volatility has not been particularly good for the exchanges’ own share prices.

Even as their volumes have rocketed, their own stock prices have languished. While CBOE’s shares are up 7 percent this year, the Chicago Mercantile Exchange’s stock price is down 22 percent. NYSE Euronext’s share price is down 9 percent for the year, and stock in Nasdaq is down 4 percent.

“It’s a little odd,” Mr. Chen said.

One reason might be that even though volumes have been picking up in recent years, the rates the exchanges charge at least for stock trading have come under pressure.

Another reason, according to Mr. Chen, is the possibility — however distant — of a financial transaction tax raised by European policy makers, which would depress trading volumes.

But perhaps the biggest reason is that the markets really think this is the “storm before the calm,” he said — that soon all this volatility will go away and trading will be becalmed, perhaps even more so than before. That won’t be good news for the exchanges.

Other industry analysts agree. They fear that the big swings will hurt investors’ confidence in the markets and keep them away in the future.

The same thing happened last year in the stock market. After the flash crash on May 6 — another time when Europe’s debt crisis was roiling world markets — May and June were busy months, but then volumes slowed markedly, partly because ordinary investors were frightened away, he said.

Stock market volumes increased for six consecutive years between 2004 and 2009 but then fell 13 percent between 2009 and 2010.

This year, despite the latest bounce, volumes across the entire stock market are 7 percent lower compared with last year.

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